Income Addition Based on Third-Party Disclosure Without Evidence Not Sustainable: ITAT [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) held that an income addition based solely on third-party disclosure without supporting evidence is not sustainable.

Sandipkumar Natwarlal Patel, appellant-assessee, had filed his return of income on 08.08.2014, declaring Rs. 5,02,140. The Assessing Officer (AO ) later received information that he had made a cash payment of Rs. 8,01,000 on 29.08.2012 to M/s Dharmadev Group for booking two shops, and the source of this investment remained unexplained. A notice under Section 148 was issued on 28.03.2018, and the assessee re-filed his return declaring the same income.

During reassessment, the AO proposed to add Rs. 8,01,000 as unexplained investment under Section 69. The assessee denied making such cash payment and explained that Rs. 5,94,500 was paid by cheque and Rs. 12,500 in cash, both supported by receipts. However, the AO rejected the explanation, relying on Dharmadev Group’s disclosure before the Settlement Commission that it had received Rs. 85.45 crore in unaccounted cash from various customers.

The assessee stated that cross-examination of the party was requested but not provided. Despite this, the AO made the addition based solely on the third-party statement.

On appeal, Commissioner of Income Tax Appeals [(CIT(A)] upheld the addition, stating that the disclosure before the Settlement Commission included cash payments made by the assessee, and therefore, the addition was justified.

The two member bench comprising Dr.B.R.R. Kumar (Vice President) and Suchitra Kamble (Judicial Member) heard both parties and reviewed the records. It referred to Central Board of Direct Taxes (CBDT) guidelines which advised that no addition should be made based solely on a statement unless backed by credible evidence. The tribunal noted that the AO had not brought any independent evidence or documents to support the addition of Rs. 8,01,000.

The addition was made only based on a third-party disclosure before the Settlement Commission, which, as per law, could not be used against the assessee unless properly admitted and supported by inquiry. The appellate tribunal also observed that the information in an unadmitted Settlement Commission application remained confidential and could not be used in regular assessment.

In this case, the AO neither conducted an inquiry nor verified the facts. The assessee had already explained that Rs. 5,94,500 was paid by cheque and Rs. 12,500 in cash, both backed by receipts. Since no contrary evidence was produced, the ITAT held that the addition made by the AO and confirmed by the CIT(A) was not justified.

Accordingly the appeal was allowed.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates